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2016 (12) TMI 1559 - HC - Income TaxReceipt of membership fees - nature of income - revenue or capital receipt - assessee is carrying on the business of club activities - Held that - Considering the fact that the security deposit is refundable after a period of 25 years or on occurrence of the contingencies mentioned in the byelaws and it cannot be said that the assessee club had absolute dominion over the impugned deposits, the case on behalf of the Revenue that the same be treated as revenue income cannot be accepted. Merely because the security deposit is not kept apart and/or subsequently the amount of security deposit is utilized by the club for other purposes such as construction and providing other amenities at the club, the same shall not loose the character of deposit , which as observed hereinabove is refundable on occurrence of the contingencies as mentioned in the byelaws. No error has been committed by the learned Tribunal in holding the same as Capital Receipt in view of the decision in the case of S.S. Sakhar Karkhana Ltd. (2004 (9) TMI 6 - SUPREME Court ). Considering the fact that the security deposit recovered from the members at the time of their enrollment as a club member is refundable on occurrence of the contingencies mentioned in the Rules, Regulations and ByeLaws, same is required to be treated as a deposit and therefore, the same is required to be considered as capital receipts. We confirm the impugned judgment and order passed by the learned Tribunal. - Decided in favour of assessee
Issues Involved:
1. Whether the Income Tax Appellate Tribunal erred in deleting the addition made on account of receipt of membership fees treating the same as Capital Receipt. Detailed Analysis: 1. Commonality of Issues: The judgment addresses a group of appeals involving common questions of law and facts, thus being disposed of by a common judgment and order. 2. Case Background: The assessee, engaged in club activities, filed returns declaring total income for various assessment years. The Assessing Officer (AO) scrutinized the returns and noticed that the assessee enrolled members on payment of security deposits as entrance fees, which were refundable after 25 years without interest. The AO treated these security deposits as membership fees and considered them as income for the year under assessment, leading to additions in the assessee's income. 3. Show Cause Notice and Response: A detailed show cause notice was issued to the assessee, questioning why the security deposits should not be treated as membership fees and considered as current year’s receipts/income. The assessee approached the Additional Commissioner of Income Tax for directions under Section 144A of the Income Tax Act, who directed that 60% of the security deposit be considered as income for the year under assessment. 4. Appeals and Tribunal's Decision: The assessee appealed against the AO's additions, and the CIT(A) partially upheld the AO's decision but spread the taxable amount over 25 years. Both the Revenue and the assessee appealed to the Income Tax Appellate Tribunal. The Tribunal, relying on the Supreme Court's decision in S.S. Sakhar Karkhana Ltd. and the Gujarat High Court's decision in Unique Mercantile Services Pvt. Ltd., ruled in favor of the assessee, treating the security deposits as capital receipts. 5. Revenue's Argument: The Revenue argued that the Tribunal erred in treating the security deposits as capital receipts, emphasizing that the deposits were utilized for construction and providing facilities at the club and were not kept apart. The Revenue relied on the Supreme Court's decision in Bazpur Coop. Sugar Factory Ltd. to support their contention. 6. Assessee's Argument: The assessee contended that the security deposits, being refundable after 25 years and non-interest bearing, should be treated as capital receipts. The assessee relied on the Supreme Court's decision in S.S. Sakhar Karkhana Ltd., which distinguished between deposits and revenue receipts based on the obligation to repay and the nature of the deposits. 7. Court's Analysis and Decision: The court examined the Articles of Association, Rules, Regulations, and Bye-Laws of the assessee, noting that the security deposits were refundable after 25 years or upon certain contingencies. The court emphasized that the true nature and quality of the receipt determine its classification, not merely its utilization or the head under which it is entered in the accounts. The court distinguished the present case from Bazpur Coop. Sugar Factory Ltd., noting that the deposits in the present case retained their character as deposits despite being used for construction and other purposes. 8. Conclusion: The court upheld the Tribunal's decision, confirming that the security deposits should be treated as capital receipts and not as income. The substantial question of law was answered in favor of the assessee and against the Revenue, leading to the dismissal of the Revenue's appeals.
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